Long Term Investment Idea

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Todd Harrison of Minyanville recently noted a breakout in the home builders index HGX.  While that index is still in a longer term downtrend from 2005, it is currently up trending and has broken up out of a downtrend from 2008.

Gee, the big money knew something was up with housing 3 years before it came crashing down.

Anyway, there is an ETF which can be used to invest in the home builders which is XHB.  An ETF is a basket of stocks, focused on an industry or sector that insulates you somewhat from one or more of the individual companies going bust.

I kind of like the idea because most people would puke if you suggested investing in home building right now and that is the perfect time to start building a position in an industry that is never going to go away.  Like I wouldn't do steam powered PCs for an opposing example.

Following is a long term chart, showing the lifespan of the XHB index going back to 2006 showing a long term downtrend.  A trend is recognized as 3 points over or under which a line can be drawn.  The downtrend is easily recognizable.  The uptrend from March 2009 is not confirmed as only two points touch the line but you can extend the line as time rolls on and see how it plays out.  The breakout of the downtrend is more important.

Here is a short term view of the breakout of the downtrend that happened around $17.  The market likes to test breakouts so I wouldn't be surprised to see this ETF head back towards 17.00 in the next couple weeks before heading back up (or down) but there is certainly no guarantee of that happening.

If you like the idea, one strategy would be to build a position over a period of time, like the next 6 months to a year and average into it.  So, for example, put 5% of your intended dollars into it now.  If it went back to 17, add another 20%, then try to buy it when it's weak. 

I would define weak by looking at the MACD oscillator at the bottom of each chart.  In the green is strong and in the red is weak.  Everything always goes up and down.  You'll never pick an exact bottom but if you buy when it's weak, you'll likely be happier than buying when it's strong.  Here's a great site for information about all aspects of the markets and investing.

(To get the link for MACD, I went here, selected Dictionary, then Technical Analysis and went to page 2).

 Pro's:

• I read where the property owners (banks mostly) bulldozed 20,000 houses just in Cleveland  last year.  It would seem they are going to get the home inventory in shape one way or the other.
• People will always need houses, even if they're only going to rent them.

 Con

•  The 20% minimum down for a mortgage seems like it may force a lot more people to remain in apartment living.

• Restoration of a true healthy home building environment still seems like a multi-year away event, but who knows.

Aside from housing, Technology stocks always lead a bull market.  In that vein, a couple that the pros like are Google (GOOG), and SanDisk (SNDK).  SanDisk makes those memory cards for cameras and other devices but also makes Solid State Disk drives.  Solid State drives are big chunks of memory with no moving parts.  Expect every computer device to have SSD's as time goes on.  Especially mobile devices.

I personally don't like Apple here, as it is what the market calls priced for perfection.  Stock prices for a company go up based on revenue growth and Apple has shot up because of its incredible growth  with iPod, iPad, iPhone.  Eventually it will hit the law of big numbers like Cisco system did and will not be able to grow 50% a year or even the 25% minimum growth the pros like to see to expect a rising stock price.  It may go to 1,000 bucks, I just don't consider it a high percentage bet.

Anyway, what do you think?